Cabinet looks to improve local government finances

The Executive Yuan is set to approve draft amendments to the Public Debt Law (公債法) on Wednesday in a bid to ease local governments' financial woes.

The changes would raise the debt ceiling of local governments by 1 percent.

The total debt cap of central and local governments combined, however, would remain unchanged as the Cabinet would also approve a 1 percent decrease to the central government's debt ceiling.

If approved by the legislature, the nation's 21 counties and cities -- excluding the two special municipalities of Taipei and Kaohsiung -- will be able to borrow an additional NT$150 billion a year.

According to the Public Debt Law, the cumulative debt of central and local governments combined should not exceed 48 percent of the previous three years' average GNP.

Of the 48 percent, the debt ceiling of the central government takes up 40 percent, counties and cities 2 percent, the two municipalities 5.4 percent and townships and towns 0.6 percent.

Under the new formula, the debt ceiling of the central government would drop to 39 percent, while that of counties and cities would increase to 3 percent.

According to a Cabinet official who asked not to be named, the change was prompted by the deteriorating financial situation of local governments.

"While counties and cities have incurred debts of NT$166.9 billion this year, they plan to borrow NT$66 billion more next year, or about NT$33 billion more than the amount they're allowed to borrow," the official said.

The planned overhaul has won the backing of President Chen Shui-bian (陳水扁), who in May called on the opposition parties to support the government's proposal to relax public debt restrictions to promote public construction projects and reduce unemployment.

Chen also praised British economist John Maynard Keynes' theory of raising public debt to promote public construction projects as "hatching golden eggs for golden hens."

Seen as the world's most important economist during the first half of the 20th century, Keynes was later challenged by the US economist Milton Friedman, a Nobel laureate. Friedman believes that an expansion of public debt does little to promote prosperity and could lead to inflation.

Opposition parties objected to Chen's plan, arguing the expansion of borrowing will leave more debt to our children.

Chen made the appeal after the Ministry of Finance had predicted that the government could face a shortfall of around NT$60 billion in tax revenues this year because of the economic slowdown as well as the increasing unemployment rate. The ministry based its prediction on the tax revenues in the first four months of the year.

According to Minister of Finance Lin Chuan (林全), the nation has NT$2.2 trillion through the sale of public bonds sitting quietly at banks and generating interest,

Lin said the government's debt is only 33.3 percent of GDP, far lower than Japan's 142.7 percent, Singapore's 100.7 percent, Germany's 62.4 percent and the US' 60.7 percent.

Lin said this gives the government room to incur debt for aggressive investment in public construction, which he argued would create large numbers of jobs and improve the quality of life.